Italy investigates Apple for alleged tax fraud: sources

The Yerba Buena Centre hosts an Apple event in San Francisco, California October 22, 2013.

Credit: Reuters/Robert Galbraith

MILAN (Reuters) - U.S. tech giant Apple is under investigation in Italy for allegedly hiding 1 billion euros ($1.34 billion) from the local tax authority, two judicial sources with direct knowledge of the matter told Reuters.

Milan prosecutors say Apple failed to declare to Italian tax authorities 206 million euros in 2010 and 853 million euros in 2011, one of the sources said, confirming a report by Italian magazine L'Espresso.

"Checks on the size of the tax are under way," the source said.

The Italian subsidiary of Apple booked some of its profit through Irish-based subsidiary Apple Sales International (ASI), thus lowering its taxable income in Italy, the source said.

"Apple pays every dollar and euro it owes in taxes and we are continuously audited by governments around the world," the company said in a statement. "The Italian tax authorities already audited Apple Italy in 2007, 2008 and 2009 and confirmed that we were in full compliance with the OECD documentation and transparency requirements. We are confident the current review will reach the same conclusion."

The maker of the iPhone is the latest prominent corporation to become the target of a tax inquiry in Italy amid a global crackdown aimed at preventing companies such as Google, Amazon and others from avoiding taxes.

In crisis-hit Italy, tax authorities faced with dwindling revenues have become more aggressive with domestic and multinational companies.

In June, fashion designers Domenico Dolce and Stefano Gabbana were handed a 20-month suspended prison sentence and a heavy fine for hiding hundreds of millions of euros in unpaid taxes. Both deny any wrongdoing.

"There is a global process under way and the Italian tax authority is one of the most active," said an Italian tax source. "In general, the focus is shifting towards multi-nationals that are able to lower their tax base through their international operations."

To try to fix public finances, Italy's largest ruling party, the center-left PD, has proposed legislation to oblige companies that advertise and sell online in Italy to do so only through agencies with a tax presence in Italy.

The proposal, dubbed the Google Tax, is meant to combat a tendency by corporations to shift revenue out of Italy and into low-tax countries such as Luxembourg or Ireland.

A U.S. Senate investigation in May revealed that Apple structured its operations so that the vast majority of its non-U.S. profits are reported in Ireland, by companies which, through an unusual feature of Irish tax law, are not tax resident in that country.

ASI contracts with mainly Chinese companies to manufacture iPads and iPhones. ASI then sells these products to another Irish company which resells them to retail subsidiaries in Italy and other European countries.

The pricing of the inter-company transactions ensures that the lion's share of the profit ends up with ASI, the Senate report said. Low profits in countries like Italy mean low tax payments there.

Countries usually consider companies registered on their territory to be tax resident there but Irish law allows ASI to be tax resident nowhere. This means its profits go untaxed.